Why the inflation numbers matter By Ifeanyi Uddin

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There are more fun ways to spend one’s afternoon than in the company of four egg-heads, each with very strong views on the direction in which the Nigerian economy ought to be headed. Thursday last week was one such day – it was not so much that the respective directions favoured by each of my interlocutors were mutually exclusive, it was the vertigo generated by the sheer depth of the arguments each marshalled in defence of their positions. Early in the week, the National Bureau of Statistics (NBS) had (and way ahead of its own advertised schedule) released data for April’s inflation numbers. This conclave that I was privy to attend had been convened to try and put meaning to these numbers. Part of the immediate challenge was that the central bank’s (CBN) rate-setting committee (the MPC) would be meeting for two days, beginning this Monday. There was a bank treasurer at the meeting; and his assignment was putting a finger on the possible direction of the policy rate after the MPC’s meeting. Remember that more and more, banks have put off new lending, preferring instead the assured yields from fixed rate instruments, as the coupon on treasury bills have risen in response to the CBN’s increasingly less accommodative stance.

The inflation numbers released by the NBS were not of much use. The All Items Index – that’s everything, or put in the more familiar lingo, the “headline numbers” – moved (on a year-on-year basis) from 12.1% in March, to 12.9% in April, reinforcing concern that despite the CBN’s best efforts, inflation expectations are far from properly anchored. But what was the main driver of domestic prices? There was a strong case to be made for food prices. Even the NBS admitted in its report that relative scarcity of some food products (“especially yams and other tubers”) “due to the drawdown from the end of year harvest” was the main cause of “the rise in the food index”. Still, on a yearly basis, the food index dropped from 11.8% in March, to 11.2% in April. So despite its volatility, and all of that, the headline numbers must have responded to a much stronger stimulus than the food index.

Which is okay in a very technical way. For in truth, the MPC’s best efforts should be concentrated by the core inflation rate, rather than the more volatile headline numbers. Back-out food prices and you get the NBS’ “’All items less Farm Produce’ index which excludes the prices of volatile agricultural products”. Again, the NBS accounted for the “rise in the ‘Core’ index” by “higher price levels in major divisions that compose the index”. But in truth, on a year-on-year basis, April-on-March, the core index dropped from 15% to 14.7%. Now, this is where the arithmetic got interesting. On a yearly basis, both the core and food indexes dropped in April from their March numbers. But then the headline numbers trended up. What was driving what? Or was I missing something?

Doubtless, there’s some statistical explanation for this quirk. But it is doubtful that the MPC can wait to square this circle before deciding at its meeting this week what to do with the policy rate. At this point, there is only one direction towards which the policy rate should be heading: and that is up. This is not just an acknowledgement of inflation numbers remaining sticky on the wrong side. It is equally about the rising national debt. Much has been made of the fact that currently, the national debt-to-GDP ratio stands at a modest 17% – manageable in other words. But, as recently indicated by the presidency’s request to the national assembly, this government’s borrowing requirement is uncomfortably high. Does it matter too that three-quarters of the resulting spend is “hand-to-mouth”? Maybe, maybe not! But it is important that in estimating the public debt, outliers like AMCON’s N4.7tn, and the sundry debts of government’s departments and agencies are properly reflected.

That way, the measure of the domestic economy’s fragility is clearer. All of these negative numbers are being recorded at a time when the oil price is strong on the global markets, domestic liquidity isn’t rising, and the exchange rate is strengthening. Obviously, with numbers this bad, we have exhausted all the buffers needed to ride the next shock to the economy.